Congress Would Hate to Lose Its Tax-Code Toys

By Caroline Baum -
Jun 27, 2012

It isn’t working. Or it didn’t work.
At least it hasn’t worked yet. Why not try something different?

“It” refers to traditional countercyclical monetary and
fiscal policies that are used, as the name suggests, to
counteract the effects of recession and subpar growth. For the
Federal Reserve, this means stimulating aggregate demand, which
generally entails lowering the benchmark overnight rate and
increasing the money supply through outright securities
purchases; or, in the current environment, using unconventional
tools -- carrot, stick and sledgehammer -- to drive down longer-
term interest rates.

On the fiscal front, the federal government stimulates
aggregate demand, according to Keynesian theory, by borrowing
and spending the money on things like infrastructure projects
and transfer payments to the states and the unemployed. The
government also influences aggregate supply by lowering marginal
and capital-gains tax rates. If you tax something less, you get
more of it.

So here we are, three years and trillions of dollars later,
with an economy growing at 2 percent and an unemployment rate
exceeding 8 percent for 40 consecutive months. The interest
rates on Treasury securities are at or near historic lows. Ditto
mortgage rates. The $831 billion fiscal stimulus in 2009 was
either too small, poorly designed or ineffective: Take your
pick. The Federal Reserve’s quantitative easings and curve-
twisting operations? Bank credit is growing, albeit slowly --
5.7 percent in the past year -- but lenders are still sitting on
about $1.5 trillion of excess reserves.

Something Different

Maybe it’s time for something completely different. How
about using structural solutions to address what is touted to be
cyclical weakness in the economy? And if the elevated
unemployment rate turns out to be structural, a result of a
skills mismatch between employers and job applicants, so much
the better.

We hear all the time that businesses suffer from
uncertainty: uncertainty over future tax rates (see: fiscal
cliff), and uncertainty over the added costs of Obamacare.

If that diagnosis is correct, then why not give them the
kinds of long-run policy initiatives that will soothe their
tortured psyches, arouse their animal spirits and instill the
confidence needed to invest for the future? And what better way
to do all that, and more, than comprehensive tax reform?

“Knowing the worst is better than knowing nothing,” says
Bill Dunkelberg, chief economist of the National Federation of
Independent Business. “If we’re going to have higher taxes, at
least we know what they are.”

While the NFIB’s Small Business Optimism Index hit a 4 1/2-
year high in April, it remains in recessionary territory, he
says.

I am somewhat sympathetic to the argument that uncertainty
about future tax rates and health-care costs is an impediment to
investment, especially if that “uncertainty” is tinged with
“pessimism,” as it is today.

The future is always uncertain. It was uncertain in 1999,
yet investors were buying stocks of Internet companies that had
no revenue, no profits and no real business plan. It was
uncertain during the condo-flipping frenzy in 2005, as well. And
no one mistook irrational exuberance for uncertainty.

The reverse is true today. Potential homeowners don’t
expect house prices to rise anytime soon. Concern about further
declines may be keeping them sidelined, even in the face of
record low mortgage rates.

Three F’s

Normal policy tools have been blunted this time around as
the need to pay down debt trumps the lure of rock-bottom
interest rates. So if President Barack Obama and Congress are
intent on doing something to accelerate the healing process, the
best thing they could do is put the economy on a sound long-run
footing with low, stable tax rates; no loopholes or exemptions;
realistic entitlement reform, including a gradual increase in
the retirement age for Social Security; containing health-care
costs by allowing consumers to evaluate cost versus quality (and
quantity) of care; and a budget that recognizes the government’s
spend-now-pay-later strategy is unsustainable.

Why, small businesses would be so ecstatic to see
government do the right thing -- and all the special-interest
groups so upset -- their spirits would soar.

The way things now stand, any given tax policy has a
maximum guaranteed life of two years, which is one term in the
House of Representatives. That’s why fiscal policy has to be
fixed (in stone) once it’s fixed (improved). Forget tax cuts
that are temporary, targeted and timely. They don’t work. And
they never end up being timely. Stop tweaking tax rates to get a
little more spending here, a little more investment there, and
try something big, broad and bold instead.

I doubt Congress would approve of my “Three F’s” plan for
the tax system: Flatten it, fix it and forget it. It would take
all the fun, and much of the money, out of their job. Still,
lawmakers should put fiscal policy on automatic pilot and leave
short-term cyclical management to the Fed. Yes, the Fed makes
mistakes. But it doesn’t take months of deliberations and horse
trading to arrive at something that is almost unrecognizable
because of all the unrelated add-ons.

Before the 2007-2009 recession, small businesses accounted
for most of the job creation in the U.S. For a firm with, say,
15 employees, hiring someone is more than creating a job; it’s
“an investment,” Dunkelberg says. Investing is a long-term
proposition, so the more firms know upfront, the easier it is to
plan for the future.

If the business of America is business, firms need an
environment that allows them to do what they do best. The last
thing they need is another jobs plan drafted in Washington.

(Caroline Baum, author of “Just What I Said,” is a
Bloomberg View columnist. The opinions expressed are her own.)